Companhia Paranaense de Energia – COPEL (NYSE:ELP) Q3 2022 Earnings Call Transcript November 11, 2022
Operator: Good day, ladies and gentlemen. Welcome to the Video Conference of Companhia Paranaense de Energia – COPEL to discuss Third Quarter 2022 Earnings Results. This video conference is being recorded, and the replay may be accessed at the company’s IR website, ri.copel.com. The presentation is also available for download. We inform that all participants will be in listen-only mode during the company’s presentation. Later, there will be a Q&A session when further instructions to participate will be provided. Before proceeding, let me stress that forward-looking statements are based on the beliefs and assumptions of COPEL’s management and information currently available to the company. Forward-looking statements may involve risks and uncertainties, because they relate to future events and therefore, depend on circumstances that may or may not occur.
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Investors, analysts and journalists should remember that events related to the macroeconomic environment, the industry, and other factors may cause results to differ materially from those expressed in such forward-looking statements. In this video conference, we have Mr. Daniel Slaviero, CEO of COPEL; Mr. Adriano Rudek de Moura, CFO of COPEL, as well as the officers of the subsidiaries who will be available during the Q&A session. And I would like to turn the floor to Mr. Daniel Slaviero, who will start the presentation. Mr. Slaviero, you may proceed.
Daniel Slaviero: Good morning to all. I thank you all for joining us in this video conference. Before highlighting the quarterly results of COPEL, I think it is important to talk about the letter received by the Controlling Shareholder on October 31st. As stated in the material fact, what we know is, what the State of Parana requested from CCEE and I quote to provide technical information in order to subsidize a model for a potential capital market transaction, whereby, the investment of the State of Parana and COPEL is optimized to preserving the State’s relevant shareholding in the company. As also emphasized in the material fact, and the adoption of any possible model depending on the studies to be carried out for this purpose, will be subject to certain approvals in accordance with the law and applicable regulations.
We have no information on how the study will be carried out, nor the timeframe for its completion. What we can say is that, COPEL’s management will await the development of this study, and to the extent that it is formally requested, COPEL will contribute to the work always following our corporate governance protocols. And any relevant information on this topic, of course, will be promptly informed to the market. Now, talking specifically about our earnings. Once again, we ended Q3 with adjusted EBITDA of more than BRL 1 billion and year-to-date adjusted EBITDA was BRL 4.1 billion. So growth of a little over 3% over the same period of 2021, followed by a strong cash generation of BRL 1.4 billion. Furthermore, in line with the company’s dividend payout policy, we will have a General Shareholders’ Meeting convened for November 21st, that will deliberate on the proposal of BRL 970 million in dividends in the form of interest on capital, which would represent an approximately dividend yield of 6% for the year 2022.
We continue to do well in relation to operating performance and we keep working steadily to further improve the performance of our business. And so, as we have repeatedly said, we have been pursuing growth opportunities with disciplined capital allocation. And early last month, we announced the acquisition of two more wind hubs worth BRL 1.8 billion enterprise value, which will add more than 260 megawatts of installed capacity to our portfolio. The acquisition is part of the company’s growth strategy in renewable energy. It expands the diversification of the generation matrix and is fully in line with our investment policy. The addition of these two wind farms, wind power will represent 17% of the power generation portfolio of COPEL Group, benefiting from the increase in incentivized energy and the reduction in exposure to hydrological risk.
This is an asset of very high quality that started operating recently with Foz do Areia wind turbines and PPA, either in the regulated or free market with very attractive prices. The installed capacity of the company’s consolidated wind power generation after the acquisition of this wind farm will be increased by almost 30%. From 2018 to now, with optimized operational management structure, thus allowing for operating synergy with the other companies in the Group. On the next slide, I highlight with great pride that COPEL was elected the Best Company in the Brazilian Electricity Sector in 2022 by the Valor 1000 Award. This achievement has this special interest and taste for us at COPEL, because we compete in an eminently private market, and this was the first time that the award had ESG criteria for the choice of the winner.
COPEL was also recognized for its financial results, for its management and business performance. But also for its actions to protect the environment, for its social actions, and mainly for its governance advances that led to the migration in the end of 2021 to Level 2 of governance of B3. I also highlight some recent progress made. The definition of the Foz do Areia grant bonus with a minimum value of BRL 1.8 billion. We intend to put this asset on the market in the coming weeks and hold the auction in Q4 of 2023. All these items listed on the slide, as you can see, which were approved and recently communicated to the market in the last few days are part of our Vision 2030, which will be detailed in our Investor Day to take place on November 22nd.
So this is the invitation. I invite you all to participate in the live broadcast of COPEL Day on November 22nd, starting at 9:00 AM. All of the officers will be present. The officers of the Holding and of the Subsidiaries as well as the Chairman of the Board of Directors will be attending to talk more about the outlook, growth opportunities and the future of our COPEL. It will be a great event. And now I turn the floor to Moura, our CFO to speak about the financials of the quarter, and then we’ll open the Q&A session. Thank you very much.
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Adriano Rudek de Moura: Thank you, Daniel. Good day, everyone. I also thank each and every one of you for joining us in our conference call. In the financial KPIs, I would like to start by highlighting one again the cash generation of BRL 1.4 billion, up 83% over the same quarter in 2021. In this comparison, we are excluding the effects of the pre-settlement of CRC, then by the state government in the third quarter of 2021. Year-to-date in the nine months of 22 we have already totaled BRL 4.4 billion of operating cash generation. This represents an increase of more than 90% in relation to the same period of 2021, and one of the main components of this increase is the improvement in the national hydrological scenario with less need to purchase electricity.
This is, of course, other positive impacts such as tariff adjustment, the growth of the grid market of Disco, as well as the reduction of the PMSO that we will see in detail later on. With this, we’re ending the quarter with a consolidated cash balance of BRL 4.3 billion, year-to-date adjusted EBITDA has also surpassed to BRL 4 billion, up 3.5%, Q3 22 EBITDA was BRL 1 billion. In this case, EBITDA comparability between Q3 22 and 21 was negatively impacted mainly for two reasons, deflation on transmission assets, we had deflation according to IPCA of 1.3%. In Q3 21, inflation was 3%. That gives us a negative effect on our result, and it would also highlight the lack of UEGA dispatch this year. This explains most of this reduction of almost 12% that you can see on the slide, which was partially offset by many other positive impacts as we have highlighted before.
And just one detail, this difference in deflation on transmission assets only happens according to IFRS standards, which updates assets for the fair value monthly. If we consider regulatory balance, this doesn’t exist, because the effect of inflation in the case IPCA occurs annually with tariff adjustments or reviews every five years. So in the release, we included a conciliation between balance sheet under IFRS and regulatory balance sheet where the former is lower in BRL 176 million in the quarter but greater in BRL 380 million year-to-date. As regards to the adjusted net income of BRL 403 million. Well, there was the impact of the reduction in EBITDA, as I mentioned in the results of the effective increase in the cost of debt, which we have been following for a few quarters due to inflation.
Also the rise of interest rates and also the reduction in financial revenue due to the prepayment of the CRC by the State of Parana. Despite the increase in net debt with the recent acquisitions, this cost should reduce with the expectation of the downward trend in inflation and interest. But still, we don’t have a lot of visibility as to when this will occur. Besides the cost of debt, we’re also recognizing an additional depreciation charge of BRL 16 million per quarter, mainly due to the effects of the GSF renegotiation which has already started to be amortized, according to the remaining concession term of the benefited plants. Lastly, there are no relevant non-recurring items recorded this quarter, just some minor adjustments that do not exceed BRL 25 million.
But in the third quarter of 21, there was an impact of one more than BRL 1.5 billion on the EBITDA, and this was excluded from this comparison base. Moving forward here, we have a bridge with a contribution of each business Q3 21 versus 22. The main positive and negative impacts and it is visually clear the impact of deflation on transmission assets at GeT, which I commented earlier, more than BRL 350 million in the comparison between the quarters, both on GeT’s assets and its investees jointly controlled. We have the impact in the improvement of the hydrological scenario, where the GSF average was about 75% compared to 51% in Q3 21. That led to BRL 280 million positive effect on the result, additional contribution from new businesses that stride being included, they are part of the result.
Additional BRL 40 million and the reduction in the PMSO at both GeT and DISCO, another relevant impact was the lack of dispatching from UEGA BRL 167 million quarter-on-quarter if we get these two flat factors, the impact of deflation and the lack of dispatching from UEGA that adds up to more than BRL 500 million on a comparable basis. Despite this reduction in despite the impact on GeTs for these two factors if we consider year-to-date results EBITDA already exceeds BRL 2.6 billion, up 14% compared to nine months 21. And this is the result of our strategy of efficient management in the commercialization of electricity, cost reduction plan, conclusion of works, the results are starting to be seen. And all of this will be incremented with the recent acquisition of Aventura and Santa Rosa & Mundo Novo Wind Complexes.
In this there’s robust growth. More than BRL 500 million BRL 530 million in the quarter, a 13% increase, an historical milestone. Year-to-date, this has already passed BRL 1.2 billion mark with regulatory efficiency of 11% a consequence of the increase. There is also 4.9% in the tariffs for the use of the distribution system TUSD and growth in the grid market built and valid in addition to reduction in personnel and administrative costs, we’re very confident in the continued improvement of these results based on all the measures we’re executing, both as part of the cost reduction agenda and prudent investments with positive impact on results. To conclude this part, just a comment on COPEL Mercado Livre, that continues to be among the largest traders in Brazil with relevant strategic importance in the commercialization of electricity of COPEL Group with a strong potential for sustainable growth with a capturing of opportunities with greater opening in the free market.
In terms of results, EBITDA of BRL 6 million was slightly lower than last year, basically explained by the reduction in the margins of energy purchase and sale, given a more challenging year for the segment. Moving forward in PMSO, we see a reduction of 4.1% compared to last year, personnel reduction was significant 3% compared to the same quarter last year. 512 employees last in the last 12 months mainly through incentivized dismissal programs. This reduction more than offset the increase in salary of almost 11% in October. Last year digit increased in the INPC Net Index National Consumer Price Index. And we had some increases especially in this, but we are maintaining the adequate levels considering the relevant inflation in the period.
On the other hand, we registered a decrease in a 38% in the line provisions and reversals basically due to the reduction of BRL 12.7 million and provisions for litigation mainly labor. Finally, there was a growth of BRL 66 million in the line other operating costs and expenses as a result of the higher financial compensation for the use of water resources due to the higher dispatch of hydroelectric power plants. Speaking about investments, I’m moving a little forward. We continue to rigorously comply with the plan, both physical and financial including bringing forward some project as was the case of Jandaira Wind Hub. We have already invested more than BRL 1.7 billion up to September and we are focused on prudent investments in the distribution company, which alone has already invested about BRL 1.3 billion out of a total plant investment of BRL 1.6 billion for 2022, mainly in the transformation program that includes the Parana, Trifasico and the Smart Grid.
Just as a reminder, the acquisition of Aventura and Santa Rosa & Mundo Novo hubs will be dispersed only at the closing of the operation that is expected for next year. So there is no impact on investments planned for 2022. Moving forward, here we see the performance of leverage without the impact of PIS and Cofins. For comparability reasons, we’re talking about 1.9 times. In cases of including this provision, leverage would still be in the range of 2.3 times, but we’ll continue to focus on improving the more balanced capital structure with the levers of the dividend policy and investment policy and we are advancing well in this journey. As you can see, we do not have any foreign exchange exposure in our debt. And the main indexes are DI and IPCA.
With the expectation of reduced inflation and interest rate, we will have lower nominal costs. In terms of maturities, there are no red flags here. Values are quite reduced for 2023 and 2024, concentrating more towards 2025, but totally within our capacity of cash generation. Finally, as Daniel has already announced on at the beginning of the call on the next slide on November 21st, the Shareholders’ Meeting will deliberate on the proposal of paying BRL 970 million of interest on capital. This proposal takes into account COPEL’s cash position, maximization of tax benefits arising from this type of income in 2022. On November 22nd, soon after deliberation of the Shareholders’ Meeting, we are proposing payment of BRL 600 million on November 30th of this year, and the remaining balance, BR: 370 million by June 2023, on a date to be defined in the next in next year’s General Shareholders’ Meeting when we approve the income statement for 2022.
So thank you very much for joining us. And I want to reinforce our invitation to COPEL Day on November 22nd. Hope to see you all there. And now we can start the Q&A session.
Q&A Session
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Operator: We will now begin the Q&A session for investors and analysts. Our first question comes from Carolina Carneiro.
Carolina Carneiro: Good day. Thank you for the call. I have two questions about Foz do Areia. The concession was defined for possible extension with privatization. Since this should be your sale model you would still have a stake? And what would be the step-by-step processes to enable the sale? Second question about Araucaria. Can you help understand could you help us understand what the analysis for possible divestment will be like?
Unidentified Company Representative: Good morning and thank you for the questions. Speaking about Foz do Areia. The Ministry published the ordinance with BRL 1.83 billion both for the price of energy and WACC, they haven’t really communicated that. We expect to have access to the data. And we’re the foundation for this study. But in our calculations, we understand that the value is very much adequate to the size, in the capacity for revenue generation and result that the asset has. So, this is a value that in our calculations seemed reasonable and adequate. We have both financial advisors and legal advisors standing by. In the next few weeks, our Department of New Businesses is working with our internal team and advisors to put the process out in the market.
So that we can do this in Q4 of next year in the ordinance itself, the deadline is December 10, 2023. First to have adjudication, and the renewal of the concession, sale of control with renewal and then we have 15 days to 20 days to pay the grant bonus. In COPEL Day, we will be giving more detail, more color on this process. But overall, this is what we expect. We have seen large respected companies from Brazil and multinationals already shown some interest. And we believe that well given the quality of the asset, we believe that we’re going to have good competition among our partners in the Foz do Areia plant. Regarding Araucaria. The Board of Directors on November 4th approved an in-depth study for divestment in Araucaria in a context of net zero carbon net zero in our carbon net zero plan that we have by 2030.
So this was a significant step, a relevant step. Araucaria is an asset with a load center with a lot of megawatts, it recently went through a major overhaul, a complete retrofit. So the asset just like Foz do Areia is ready is at the top of its mark. And I believe that it could be interesting for somebody who has a strategy to grow in gas source, it could be a very interesting asset for potential buyers. We expect that in the coming months, the study is expected to evolve so that we can take this take a complete analysis to our governance committees, but this is moving forward. And the trend is that we will sell 100% of COPEL’s shares in this asset so that we can continue our growth in a 100% renewable matrix with hydro, solar and wind matrix.
Operator: Our next question comes from .
Unidentified Participant: Given that COPEL has earnings retention of more than BRL 7 billion, is it possible to pay more dividend still in 2022?
Unidentified Company Representative: Felipe. Indeed, COPEL has a reserve of retained profit that is quite significant. But this doesn’t mean that we’re going to have extraordinary dividend payout. On the contrary, we will continue to follow our dividend payout policy. As I mentioned during the presentation, we have interest on capital apart of the dividends will be paid still this year and the remaining balance will be paid next year and possible adjustments will be made according to the 2022 balance sheet, at year end that will be presented and approved in the Shareholders’ Meeting in April. So we will continue with our dividend payout and the current policy.
Operator: Our next question by Marcelo Sa.
Marcelo Sa: Hello, everyone. Could you please comment whether the studies that were requested by the State of Parana of operation in the capital markets will also consider privatization scenarios. What is the expectation regarding the timing to complete the study? And what is the timing regarding the positioning of the State of Parana regarding future strategies?
